America’s Interest inthe World Trade Organization:

An Economic Assessment

November 16, 1999

A Report by the Council of Economic Advisers

Table of Contents

I. Overview 1

II. America Benefits from Market Liberalization 5

America in the Global Economy 6Trade Raises Living Standards 11

III. The WTO Promotes Rules-Based Market Opening 15

The Trading System Provides a Framework for Liberalization 16Recent Negotiations Further U.S. Policy Objectives 20Countries Gain from Lower Barriers 22New Rules Convey Additional Benefits 24

IV. The WTO Extends the Benefits of Trade and Encourages Growth 29

The Multilateral Trading System Provides Opportunities for Growth 30The Full Realization of Benefits Requires Further Integration 31

V. The U.S. Agenda Meets the Challenges of the 21st Century 32

Much Remains to Be Done 32U.S. Objectives for Seattle and Beyond 34

AppendixKey Achievements of the Uruguay Round Negotiations 37

Figures1. Mean Tariff Rates Weighted by World Imports 1998 52. U.S. Trade as a Percent of GNP 1900-1998 63. U.S. Exports and Imports in 1998 74. Goods and Services Produced for Export 1929-1998 105. Average U.S. Tariff Rates 1900-1998 166. World Exports, GDP, and Tariff Estimates Post-WWII 177. Services as a Percent of U.S. Trade and Production 1950-1998 268. U.S. Exports of Royalties and License Fees 1986-1998 289. Annual Growth of Real GDP Per Capita in Selected Developing Economies 2910. Food, Beverage, and Tobacco Prices in Selected OECD Economies 1996 33

Tables1. U.S. Manufacturing Trade as a Percent of Total Shipments and Consumption 82. Eight Rounds of GATT Negotiations 19

List of Frequently Used Acronyms 42

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I. Overview

The U.S. economy looks to the future from a position of strength, due in no small part to itsopenness and flexibility. U.S. tariffs are among the world’s lowest, averaging only 2.8 percenton internationally comparable terms. The United States is also the world’s leading trader ingoods and services, accounting for about 14 percent of world exports and about 16 percent ofimports. Americans benefit directly from open markets. U.S. producers benefit from exports ofhigh-tech manufactures, agriculture, and services, among other products. U.S. workers enjoyhigher paying jobs and U.S. consumers enjoy lower prices and more product variety.

For over half a century the multilateral trading system, first consisting of the General Agreementon Tariffs and Trade (GATT) and more recently the World Trade Organization (WTO), hasplayed a key part in meeting U.S. trade policy objectives. It has reduced barriers to trade,strengthened the rule of law, and encouraged economic development internationally. The post-WWII period has seen exceptional growth in much of the world as the global economy hasbecome increasingly integrated.

While its achievements have been considerable, the trading system remains a work in progress.A new round offers opportunities to enhance market access, improve the functioning of theWTO, more effectively integrate labor and environmental considerations, and ensure that thebenefits of trade are shared more widely.

America Benefits from Market Liberalization

On the threshold of the 21st Century, two related features of the U.S. economy are particularlystriking. First, it has never been more prosperous and, second, it has never been as integratedinto the world economy. The U.S. economy provides its citizens with living standards that arehigher than those in many other major industrial economies – measured in terms of purchasingpower, per capita income in the United States is 27 percent higher than in Japan and 41 percenthigher than in Germany. The U.S. economy is able to provide such high living standards, in part,because Americans engage extensively in international trade. As an indicator of its size andscope, U.S. trade’s value relative to U.S. GNP has been almost 25 percent in recent years, thehighest it has been at any point in the past hundred years.

• On average, Americans export about 11 percent of all the goods and services they produceand import about 13 percent of all they consume.

• Many high-tech U.S. manufacturing industries, such as computers and electronics, export 25percent or more of their total shipments; U.S. wheat and rice growers export over 40 percentof their total production.

• The United States is the world’s leading services exporter, accounting for over 18 percent ofall commercial service exports.

• Recent studies provide evidence of substantial wage advantages in jobs supported by goodsexports – on the order of 15 percent.

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The WTO Promotes Market Opening

America gains most when other nations lower their trade barriers as we reduce ours. Indeed, asone of the world’s most open economies, we have a particular interest in promoting liberalizationabroad. The system of binding commitments first established in the GATT and now advancedby the WTO has provided a framework for liberalization. Consistent with U.S. goals for an openmultilateral trading system, the GATT was founded in 1948 on principles of reciprocity and non-discrimination. On this basis, it has been extremely successful in opening markets.

• At the end of WWII, the average tariff on industrial products in developed countries wasabout 40 percent. Today, the average is about 90 percent lower.

The Uruguay Round, concluded in 1994, reduced tariffs on industrial products and extendedagreements to previously neglected sectors, such as agriculture, textiles and clothing, andservices. Recent economic studies evaluate potential gains from the Uruguay Round, but captureonly the effects of certain conceptually quantifiable features, namely reducing tariffs, reducingexport subsidies, and eliminating quotas on some goods. They do not capture gains fromprovisions for services, dispute settlement, and intellectual property.

• Recent studies of some potential Uruguay Round benefits estimate that annual global incomecould rise $171 billion to $214 billion upon full implementation, in 1992 dollars; for theUnited States alone, the gains could amount to $27 billion to $37 billion each year.

Post-Uruguay Round negotiations yielded additional market access commitments in financialservices, basic telecommunications services, and information technology, opening up newopportunities in some areas in which the United States is highly competitive. Growth in U.S.exports of private services point to potential gains from market opening.

• Since 1994, U.S. financial service exports have grown, on average, by 24 percent annually innominal terms, U.S. insurance service exports have grown by 14 percent, and U.S. business,technical, and professional service exports have grown by 12 percent.

The WTO Promotes the Rule of Law

To fully realize the benefits of trade, however, requires more than agreement to reduce barriers.Sustaining support for the trading system also requires rules that are credible and equitable. Forfirms to undertake the necessary investments to service foreign markets, they need to believe thatnew barriers will not be raised and that old ones will not reassert themselves. To rely on foreignsuppliers, buyers need to believe likewise that market access will not be disrupted. Traders needassurance that commitments will be binding and that markets will remain open in the event ofchanged circumstances. Moreover, the rules should ensure that governments play fair – that theynot seek advantage for favored interests by subsidizing their producers or passing regulationsthat unnecessarily distort international trade. Fairness also requires that the gains from trade areshared widely and do not come at the expense of core labor standards or the environment. In sodoing, the WTO must strike an appropriate balance between the needs of the trading system andthose of sovereign nations. The WTO Agreements do not and will not preclude the United States

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from establishing and maintaining its own laws; impair the effective enforcement of U.S. laws;or limit the ability of the United States to set and achieve its environmental, labor, health, andsafety standards at the levels it considers appropriate. Through consensus, the WTO has donemuch to achieve both credibility and fairness.

• WTO rules allow nations to take anti-dumping measures, countervailing-duty measures, andaction against import surges, provided they follow certain procedures. The United States hasused its own WTO-consistent trade laws to combat unfair foreign practices and to providesafeguards for domestic producers.

• The WTO provides an improved framework for resolving disputes. It has proved extremelyuseful to the United States, which as a complaining party has so far prevailed in 22 out of 24cases, having favorably settled 10 without litigation and having won 12 in litigation.

• The WTO provides rules for protecting intellectual property rights. For the United States,one of the world’s most innovative nations, such rights convey substantial value. In 1998,U.S. exports of royalties and license fees amounted to about $37 billion.

By and large, WTO members have adhered to their commitments. The sustained trend towardsmarket liberalization over the postwar period and the maintenance of commitments not to raisebarriers even in the face of international financial crises, stand in sharp contrast to the tradepolicy experience during the inter-war period.

The WTO Extends the Benefits of Trade and Encourages Growth

The United States has long advocated the use of the multilateral trading system to promoteeconomic development internationally. The success of the trading system and its value inreinforcing market-oriented development strategies has become increasingly appreciated overtime. Between 1989 and 1997, developing countries increased their share of world trade.Originally dominated by the developed countries, participation in the multilateral trading systemhas grown as others have sought inclusion. Today, the WTO has 135 members and another 32nations are seeking accession. This allure of the trading system supports the view thatinternational trade is not a zero-sum game. Both the United States and its trading partners reapthe benefits. In fact, the shared aspect of the gains from trade, between trading partners, is a coreprinciple of economics. However, not all WTO members are currently well positioned to use thesystem effectively. Some of its least developed members lack the necessary institutions andinfrastructure to reap the full benefits of trade – in those cases, capacity building and technicalassistance, coupled with market opening, could help spread the benefits.

The U.S. Agenda Meets the Challenges of the 21st Century

The prospect of another round of multilateral trade negotiations provides new opportunities toadvance U.S. interests in opening foreign markets, establishing an effective rule of law, andpromoting economic development internationally. Barriers remain high in agriculture andservices, sectors in which we are highly competitive. In agriculture, for example, bound tariffrates average about 50 percent around the world compared with less than 10 percent in the

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United States. Average food and related prices in the EU and Japan are 34 and 134 percenthigher, respectively, than in the United States. Moreover, the system of commitments and rules,though much improved, still requires further strengthening. And, much work remains to be doneto ensure that developing countries – including the least developed – obtain the market accessand technical assistance they need to realize the benefits that international trade can afford. TheUnited States is also committed to putting a “human face” on the global economy.

For these reasons, the United States is proposing to launch a new round, lasting no more thanthree years, that focuses on market access in services, agriculture, and industrial products. It isalso seeking immediate tariff cuts in eight key areas, agreement on transparency in governmentprocurement, extension of the prohibition on e-commerce duties, and an agreement to makeadditional information-technology products tariff free. The United States also sees the need tostrengthen the WTO’s relationships with other international organizations and to make the WTOmore open and accessible. The United States has sought to create a trading system that spreadsthe benefits of trade as widely as possible, both across and within countries, and is supportive ofcore labor standards and the environment. Thus, the United States is:

• Seeking to bring more nations into the trading system and ensure that developing countriesfully benefit. The United States will work to give the least developed countries greateraccess to global markets. The United States is also proposing measures to provide technicalassistance on implementing trade policy and strengthening institutions in developingcountries responsible for trade, labor, environmental, and other policies that influence thegains to living standards from trade.

• Proposing to establish a WTO Working Group on Trade and Labor in Seattle and enhancethe institutional links between the International Labor Organization (ILO) and the WTO, bygranting the ILO observer status at the WTO.

• Pursuing opportunities that can both open markets and yield environmental benefits, such aseliminating fishery subsidies that contribute to over-fishing and eliminating tariffs onenvironmental goods; seeking to strengthen cooperation between the WTO and internationalorganizations dealing with environmental matters like the UN Environmental Program.

• Committing to conduct a U.S. environmental review of the likely consequences of the Roundand proposing that the WTO Trade and Environment Committee help identify environmentalimplications as the Round proceeds.

The WTO provides its members with some of the conditions that are necessary for successfuleconomic performance, but the benefits it confers are not automatic. To fully realize the benefitsof trade, it is necessary to adopt complementary domestic policies, such as those to help ensurethat displaced resources are successfully re-employed. This requires effective mechanisms thathelp workers, farmers, and firms adjust to change when need arises – though economic studiestypically find that trade is a small factor in overall job displacement. The Clinton Administrationhas made opening markets at home and abroad a major pillar of its economic strategy, but it hasalso adopted the complementary policies of investing in people and fiscal prudence.

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II. America Benefits from Market Liberalization

The United States approaches market liberalization from a position of strength in the globaleconomy, partly because of its openness and flexibility. U.S. tariffs on imports are among thelowest in the world, averaging about 2.8 percent on comparable terms (Figure 1).1 And U.S.producers are among the most competitive in many sectors, including high-tech manufactures,agriculture, and services. Today, the United States is more integrated into the global economythan ever before – it is also the world’s largest trader. The United States accounts for about 14percent of the world’s goods and services exports and about 16 percent of its imports.2 Becausethe U.S. market is already so open, it stands to reason that Americans would have much to gainand relatively little to lose from additional multilateral liberalization. To date, the multilateraltrading system has provided an effective forum for working toward open markets.

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Source: World Development Indicators, 1999, World BankNotes: * indicates data from 1997; ** indicates data from 1996.

Figure 1: Mean Tariff Rates Weighted by World Imports 1998

United States

U.S. businesses, farmers, workers, and consumers already benefit from U.S. policies that enablethe free flow of goods and services at the U.S. border and from international agreements thatprovide access to foreign markets. U.S. businesses benefit directly from export opportunities –some industries, such as electronics and computer equipment, sell at least a quarter of their

1 In 1998, U.S. tariffs averaged about 2.8 percent, weighted by world imports; however, the share of total U.S. dutiescollected in total U.S. imports for consumption was only 2 percent. Figure 1 provides only a partial indication ofcountries’ openness. A full international comparison would require an analysis of other measures, such astransparency and non-tariff barriers that are not reflected in Figure 1.2 Using data from the World Trade Organization, http://www.wto.org/wto/statis/stat.htm (downloaded November11, 1999). The data are for world trade in goods and commercial services, including intra-EU trade.

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merchandise overseas. They also enjoy access to low cost inputs, which makes them morecompetitive domestically and internationally. Many U.S. farmers also ship large shares of theirproduction abroad. U.S. workers enjoy higher paying jobs and U.S. consumers enjoy lowerprices and more product variety.

America in the Global Economy

In recent years, trade’s share in U.S. GNP has approached 25 percent, a record high for thiscentury (Figure 2).3 In 1998, U.S. goods and services exports and imports amounted to about$966 billion and $1,116 billion, respectively. On average, Americans exported 11 percent of thegoods and services they produced and imported 13 percent of those they consumed. Capitalgoods accounted for the largest share of U.S. exports, about 31 percent, followed by services,then industrial supplies and materials (Figure 3a). Capital goods also accounted for the largestshare of U.S. imports, about 24 percent, followed by consumer goods, then services (Figure 3b).The sectoral data suggest the importance of two-way trade within industries. The United Statesis competitive across a wide range of industries, in part, because U.S. firms have access to low-cost components, resulting in lower production costs.

Figure 2: U.S. Trade as a Percent of GNP 1900-1998

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Source: The data for 1900-1970 are from the U.S. Department of Commerce, Bureau of the Census, Historical Statistics of the United States, Part 2 (Washington, DC: 1975); the data for 1971-1998 are from the Bureau of Economic Analysis. Notes: Export and import data from 1900-1918 do not include "Other Transactions"; import data from 1900-1919 do not include "Direct Military Expenditures."

Exports

Imports

Exports + Imports

3 The share of trade in GNP provides a figurative benchmark. While exports come out of domestic production,imports supplement domestic consumption.

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Source: U.S. Department of Commerce, Bureau of Economic Analysis

Figure 3a: U.S. Exports in 1998Total = $966 Billion

IndustrialSupplies

andMaterials

15%

CapitalGoods31%

Services29%

Other

Goods4%

ConsumerGoods

8% AutomotiveProducts

8%

Foods,Feeds, andBeverages

5%

Figure 3b: U.S. Imports in 1998Total = $1,116 Billion

CapitalGoods24%

AutomotiveProducts

13%

ConsumerGoods19%

OtherGoods

5%

Services17%

Petroleumand

Products5%

IndustrialSupplies

andMaterials

13%

Foods,Feeds, andBeverages

4%

More detailed data on U.S. trade in manufacturing, agriculture and services provide even morecompelling evidence of the extent of U.S. integration in the global economy and the value ofopen markets. For a variety of products – ranging from computers to wheat – access to globalmarkets contributes substantially to U.S. production and consumption.

Manufacturing industries are highly integrated. A comparison of trade, production, andconsumption data suggests substantial international integration in a number of industries, and anoutward orientation in high-tech manufacturing. On average, exports accounted for about 15percent of shipments in manufacturing and imports accounted for about 19 percent ofconsumption in 1996. Ranked on the basis of export shares, industrial and commercialmachinery and computer equipment, electronic and other electrical equipment and components,and measuring, analyzing, and controlling instruments rated highest (Table 1). In each of theseindustries, exports accounted for roughly 25 percent or more of U.S. firms’ total shipments.Ranked on the basis of import shares, leather products, apparel, and miscellaneous manufacturesrated highest – imports accounted for at least 39 percent of domestic consumption in eachindustry. But, imports also accounted for a significant share of consumption in electronic andother electrical equipment and components and in industrial and commercial machinery andcomputer equipment – roughly 33 percent and 34 percent, respectively. As above, the data onindustrial and commercial machinery and computer equipment suggest the importance of two-way trade. A closer look at more recent 1998 data on U.S. trade, production, and consumption incomputer equipment provides further evidence:

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SIC Exports as a Imports as a Code Product Description Percent of Percent of

Shipments Consumption

20 Food and Kindred Products 6.82 6.1421 Tobacco Products 17.09 0.9622 Textile Mill Products 10.00 11.4223 Apparel and Other Finished Products Made From Fabrics… 10.43 39.1124 Lumber and Wood Products, Except Furniture 7.62 11.9625 Furniture and Fixtures 5.63 15.0526 Paper and Allied Products 9.02 9.3727 Printing, Publishing, and Allied Industries 3.19 2.1228 Chemicals and Allied Products 17.73 13.7329 Petroleum Refining and Related Industries 3.98 9.8030 Rubber and Miscellaneous Plastic Products 8.26 10.1031 Leather and Leather Products 23.46 70.9732 Stone, Clay, Glass, and Concrete Products 5.59 10.9633 Primary Metal Industries 13.09 19.6634 Fabricated Metal Products, Except Machinery and Transportation… 7.72 8.7635 Industrial and Commercial Machinery and Computer Equipment 32.14 33.9236 Electronic and Other Electrical Equipment and Components… 25.15 32.6537 Transportation Equipment 21.45 27.3038 Measuring, Analyzing, and Controlling Instruments… 24.72 22.0839 Miscellaneous Manufacturing Industries 16.31 47.25

All Manufacturing 15.18 19.21

Source: U.S. Department of Commerce, International Trade Administration

Table 1: U.S. Manufacturing Trade as a Percent of Total Shipments and Consumption 1996

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• In the computer industry, including computer hardware and peripherals, U.S. exportsaccounted for about 43 percent of domestic producers’ total shipments and imports accountedfor about 58 percent of final and intermediate domestic consumption.4

• According to a recent report, more than 60 percent of the hardware value of a typical U.S.personal computer system is made up of floppy and hard disc drives, video cards, multimedia

4 The computer industry is defined here as SIC 3571, 3572, 3575, and 3577. The data are from a report prepared bythe McGraw-Hill Companies and the U.S. Department of Commerce, International Trade Administration, U.S.Industry and Trade Outlook ’99 (1999), p. 27-5.

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kits, monitors, mother boards, mouse devices, power supplies, and random access memoryimported from Asia.5

Farmers export large shares of production. Here also, the data show that Americans benefitfrom opportunities to sell their products internationally. In 1998, U.S. agricultural exportstotaled about $54 billion, accounting for roughly a quarter of cash receipts.6 However, for manybulk commodities, high-value products, and horticultural products, the share of production soldas exports was considerably higher. U.S. wheat and rice growers exported over 40 percent oftheir production, U.S. sunflower seed oil producers exported over 80 percent of their production,and U.S. almond growers exported over 70 percent.7

Service exports have grown dramatically. Though typically “small” relative to total industryproduction, U.S. exports of services have grown dramatically, providing further evidence of theincreasing importance of global linkages. U.S. service exports have grown as a share ofdomestic production of services (Figure 4). They have also grown as a share of total exports.

• U.S. service providers have almost tripled their share of export-related production over thepast five decades. In 1950, only 2.2 percent of U.S.-produced services were exported; in1998, that share was about 6 percent.

• Over the same period, U.S. service exports have generally grown more rapidly thanmerchandise exports. As a result, their share of total U.S. exports has increased from about17 percent in 1950 to about 29 percent in 1998.

• The United States is the world’s leading services exporter, accounting for over 18 percent ofall commercial service exports in 1998.8 Among the leaders were travel services,transportation services, royalties and license fees, business, professional and technicalservices, and financial services, together accounting for about 78 percent of all U.S. privateservice exports.9

5 Ibid., p. 27-1.6 Data are from the U.S. Department of Agriculture, Foreign Agricultural Service (July 1999); reporting exports as ashare of cash receipts less government payments.7 Data are from the U.S. Department of Agriculture, Foreign Agricultural Service (July 1999); reporting exports as ashare of domestic production, using 1996-98 average volume.8 See World Trade Organization, http://www.wto.org/wto/statis/prerelease.htm (downloaded October 21, 1999).9 Royalties and license fees includes some receipts, such as those from books, records and tapes and broadcastingand recording of live events, that could be apportioned to specific industries. Within the category of business,professional, and technical services, the leaders are construction, engineering, architectural, and mining services;installation, maintenance, and repair of equipment; legal services; operational leasing; and computer and dataprocessing services – together accounting for almost 60 percent of all U.S. exports of business, professional, andtechnical services. See U.S. Department of Commerce, Economic Statistics Administration, Bureau of EconomicAnalysis, Survey of Current Business (July 1999), p. 102 and (October 1999), p. 64.

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Figure 4: Goods and Services Produced for Export 1929-1998

Source: U.S. Department of Commerce, Bureau of Economic AnalysisNote: Data prior to 1959 are not subject to October 1999 data revision

America’s trading partners are located around the world – in Europe, Asia, Latin America, andAfrica – but they tend to be concentrated in developed and neighboring countries. Canada isAmerica’s top ranking partner, accounting for about 21 percent of merchandise trade (exportsand imports combined). Measured on the same basis, the EU is a very close second, accountingfor just over 20 percent of the total, followed by Japan, accounting for just over 11 percent, thenMexico, accounting for just under 11 percent. In aggregate, non-OECD countries account forabout 31 percent of U.S. trade, though the least developed countries account for a small share –less than one percent of the total.

Although the U.S. economy is “open,” in the sense that its average tariffs are among the world’slowest, the United States – by virtue of its size and its distance from many major markets – is notas dependent on trade as many other nations. Total trade’s share in U.S. income is about 25percent – well below total trade’s share in world income, about 46 percent. As a result, onemight argue that the United States benefits from trade relations with countries in Europe, Asia,Latin America, and Africa, while remaining relatively buffered from adverse global events bythe strength of its domestic markets. We see evidence of our resilience in the recent financialcrisis, wherein poor economic conditions in Asia and elsewhere led to a temporary reduction indemand for U.S. exports and contributed to a rise in our current account deficit. Although somesensitive sectors of the U.S. economy, including parts of manufacturing and agriculture, havebeen adversely affected by this international slowdown, our overall economy has been able tosustain robust growth and maintain full employment.

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Trade Raises Living Standards

We have seen that America has low trade barriers and is heavily involved in the global economy,but the question remains as to how we benefit. International trade raises U.S. living standards byimproving the efficiency with which we allocate resources and enhancing our productivity.10

Through exports, the expansion of internationally competitive sectors boosts incomes and large-scale production reduces costs. At the same time, the availability of imports increases buyingpower, improves consumer choice, and helps stave off inflation.

In his famous treatise, The Wealth of Nations, Adam Smith pointed out the economic benefits ofspecialization and the degree to which these benefits depend on a large market. The foundingfathers of the United States revealed an innate appreciation of this insight when they enacted theConstitution. In particular, they explicitly prohibited states from restricting trade with otherstates. This prohibition is arguably the most effective free trade agreement in history. Itestablished open trade among the states, creating a large internal market that has helped to makethe United States one of the richest economies in the world. Because they can freely sell theirproducts on this large market, Californians can produce more wine than if they could only to sellin their own state. Likewise, farmers in Kansas can grow more corn and factory workers inMichigan can build more automobiles. As a result of these activities, all Americans enjoy lessexpensive wines, corn, and automobiles.

Today, we take our open internal market for granted. Few would likely argue that the East orWest of the United States would benefit if a barrier prevented trade between them. Yet the casefor free international trade is fundamentally the same as the case for free domestic trade. Accessto large, diverse markets permits specialization and specialization yields gains to producers andconsumers. Open trade allows Americans to earn higher incomes than if they sold only at home.It also allows them to buy an array of products that is less expensive and more varied than if theycould only purchase domestically. International competition also exposes U.S. industries toforeign technologies and stimulates them to become more inventive and productive.

However, it is important to remember that the internal market works, in part, because aneffective rule of law governs domestic transactions. Each of the 50 states enjoys considerablelatitude in setting its own local policies, but an overarching system of federal rules andguidelines assures openness across the country. Much in the same way, the multilateral tradingsystem encourages transparent and predictable rules of conduct.

Countries gain from specialization. When a country produces and exports those goods andservices that it can produce relatively inexpensively, and imports those that are relativelyinexpensive to produce abroad, that trade can improve standards of living on both sides of thetransaction.11 For example, the United States, with an abundant supply of high-skilled labor and

10 The discussions of specialization, competition, and productivity that follow draw from the Economic Report of thePresident (Washington, DC: February 1998), pp. 236-238.11 A country’s relative strengths, i.e., its comparative advantage, derives in part from its “natural” endowment ofresources, such as capital, labor, and land. But other factors – including a country’s domestic policies – are alsoimportant. They can affect both the quantity and quality of its resources. The U.S. economy, for example, benefits

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capital, can produce financial services at lower cost, relative to other products, than can mostdeveloping countries. Costa Rica, with an abundant supply of low-skilled labor and appropriategrowing conditions can produce coffee at lower cost, relative to other products, than can theUnited States. In this example, the United States would benefit from producing and exportingfinancial services and importing coffee; the reverse is true of Costa Rica. Throughspecialization, each country puts its resources to use where they can generate the most economicvalue. Thus, when countries open their borders to trade, or reduce existing barriers, theyreallocate resources to the uses in which they will be most profitable.

Competition enhances productivity. Foreign competition gives domestic firms an incentive toraise their productivity. Unlike other one-time gains, these gains are recurring.12 Oncecompetition is introduced, it leads to a cycle of productivity improvements and qualityenhancements that continue to benefit the economy indefinitely. Studies of the United States andJapan find a positive relationship between import growth and productivity growth.13 Trade canalso increase growth by improving the flow of knowledge and transfer of technology. Withprotection of intellectual property rights, foreign competition can promote research anddevelopment and lead to innovation – in both new products and new production processes.

Exports provide clear benefits. By selling overseas, firms can increase their sales and earnings.In response, production expands and more Americans are drawn into jobs in the most productiveand internationally competitive sectors of our economy. In 1994, the total number of U.S. jobssupported directly and indirectly by manufacturing exports was one in five.14 In agriculture theshare was one in three. Since that time, U.S. goods exports as a share of U.S. goods productionhas risen. Access to larger markets can also reduce costs and increase innovation.

• The expansion of internationally competitive sectors boosts incomes. Recent studies provideevidence of substantial wage advantages in jobs supported by goods exports – roughly on theorder of 15 percent. One such study indicates that wage premiums for exporting plants rangefrom 12.5 to 18 percent on average for plants of all sizes, locations, and industries.15 Anotherstudy finds that the wages of all production and related workers in jobs supported by goodsexports were 13 percent higher than the national average, and the wages of workers in jobssupported directly by those exports were 20 percent higher.16

from an abundant supply of high-skilled labor. However, such skills are not conferred by nature, rather they areconferred by education and training.12 Among the one-time gains, foreign competition can provide incentives for firms to reduce their prices inpreviously non-competitive markets. For example, foreign competition, including the threat of foreign competition,can help dilute domestic monopolies.13 See Robert Z. Lawrence, “Does a Kick in the Pants Get You Going or Does It Just Hurt? The Impact ofInternational Competition on Technological Change in U.S. Manufacturing,” unpublished draft (July 1999) andRobert Z. Lawrence and David E. Weinstein, “Trade and Growth: Import-Led or Export-Led? Evidence from Japanand Korea,” NBER Working Paper No. W7264 (July 1999).14 See Lester A. Davis, “U.S. Jobs Supported by Goods and Services Exports, 1983-94” (U.S. Department ofCommerce, Economics and Statistics Administration, Washington, DC: November 1996), p. 3.15 See J. David Richardson and Karin Rindal, “Why Exports Matter: More!” (The Institute for InternationalEconomics and The Manufacturing Institute, Washington, DC: February 1996), p. 9.16 See Lester A. Davis, pp. iii and 7-8.

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• Large-scale production reduces and spreads costs. The economies of scale achieved byselling on world markets lower the costs of production and increase the returns to innovation.For some goods, such as automobiles, the average cost of production falls as more of thegood is produced – hence, the larger the market, the lower the cost. As a result, U.S.producers become even more competitive and U.S. consumers enjoy lower prices.Moreover, the ability to spread the fixed costs of research and development across a largersales volume allows globally competitive firms to be more innovative than those confined toselling in smaller domestic markets.

Gains from trade also come from imports. As a result of imports, consumers enjoy lowerprices, higher effective wages, and greater product selection. Imports may also lead to increasedcompetition and faster productivity growth. Recently, our ability to import has also provided ananti-inflationary safety valve – helping us to combine low inflation, steady growth, and highrates of employment.

• Imports increase buying power. The ability to buy less expensive foreign products is animportant complement to faster productivity growth in raising living standards and boostingreal wages. Today, a dollar buys 11 percent more imported goods and services than it did in1995. And, over the same period, nominal average hourly earnings have risen from $11.47to $13.31. Taken together, these two facts imply that by working an hour, the typicalproduction worker can now buy 28 percent more imported goods and services than in 1995.Moreover, foreign competition creates incentives for U.S. businesses to price their productsmore competitively.

• Imports improve consumer choice. Imports increase the variety of products and allowconsumers to buy products that are more precisely matched to their taste. Because marketsare open, U.S. consumers can choose from seemingly countless models of 4-door sedans, 2-door hatchbacks, sport utility vehicles, and pick-up trucks; they can also purchase tropicalfruit all year-round. Imports may also contribute to higher productivity by giving producersaccess to a wider array of inputs and equipment. The U.S. computer industry is among theworld’s most competitive, in part, because it can combine U.S. software and microprocessorswith other components made in Asia and elsewhere.

• Imports stave off inflation. Recently, imports have provided an anti-inflationary safety valve.Many economists ascribe some part of the recent quiescent performance of inflation to ourability to draw on global capacity. They believe that this allows the economy to achievehigher levels of employment without igniting inflation. This has allowed the Federal Reservemore leeway to keep interest rates low, which may, in turn, have contributed to the currentlow rate of unemployment.

Specialization requires adjustments. The gains from trade are not zero-sum, in that one countrydoes not “win” at the expense of another. In fact, the shared aspect of the gains from tradeacross countries is a central tenet of economics. Nevertheless, by its very nature, specializationinvolves adjustments that may create winners and losers within countries. In the face of openmarkets and increased foreign competition, some industries within a country will expand andothers may contract. Adjustments for businesses and workers in shrinking industries can be

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costly and painful. Although economic studies typically find that trade is a small factor –roughly 10 percent or less – in overall job displacement, some workers may face short-termunemployment and others may even face permanent wage reductions if they are unable to findcomparable jobs in expanding sectors.17

Trade, therefore, presents domestic challenges. But the fact that trade produces additionalincome means that, in principle, resources are available to help those who are hurt either toadapt, by becoming more productive and competitive in what they were already doing, or toswitch to new activities. One way to help in the transition is to develop programs that directlyaddress the problems of dislocation. Another way may be to encourage trade, while limiting thepace at which change occurs. Such gradualism may be desirable under certain circumstances,but attempting to prevent liberalization would be counterproductive. Permanent protectioninevitably costs more, in foregone benefits, than it saves. The key lies in an economy that issufficiently flexible and vibrant to meet the challenges of reaping those benefits.

• Domestic programs help workers find jobs. To address problems of worker dislocation –regardless of cause – the Clinton Administration has developed new programs to assist in jobsearch and training. These programs add to the assistance that is already available todisplaced workers through the Federal Trade Adjustment Assistance program. TheWorkforce Investment Act of 1998 retains a funding stream for dislocated workers andpromotes customer access and choice through a one-stop service delivery system andIndividual Training Accounts. The Administration has also ensured that lifelong learning taxcredits and scholarships are available to assist workers in preparing for new jobs. Federal joband talent banks also provide new mechanisms for helping millions of U.S. workers. On asingle day in October 1999, America’s Job Bank posted over 1.3 million jobs; that samemonth, America’s Talent Bank held over 400,000 resumes.

• The WTO Agreements and U.S. trade laws provide cushions. For example, key features ofthe Agreement on Agriculture and the Agreement on Textiles and Clothing phase-ingradually over periods of six to ten years. The WTO Agreements also allow countries to usecertain forms of safeguards to protect temporarily against import surges that seriously injureor threaten to seriously injure a domestic industry. The United States has invoked its ownsafeguard provisions three times since the creation of the WTO, in cases involving cornbrooms, wheat gluten, and lamb meat.

17 Data from the 1980s show that trade contributed at most 10 percent of the observed displacements frommanufacturing in the worst year of that decade. See Economic Report of the President (1998), pp. 244-245. A 1994study of potential Uruguay Round effects estimated that about 0.2 percent of U.S. work force could change jobs as aresult of changes in patterns of trade. This compares with annual job changes for other reasons of 10 percent ormore for the work force. See Susan M. Collins and Barry P. Bosworth, editors, The New GATT, Implications for theUnited States (The Brookings Institution, Washington, DC: 1994), p. 2. A Congressional Budget Office report onNAFTA concluded that the agreement would result in relatively little job displacement. The total number of jobslost would probably be well under half a million, spread over at least a decade. By way of comparison, nearly 20million workers were displaced during the 1980s. See U.S. Congressional Budget Office, A Budgetary andEconomic Analysis of the North American Free Trade Agreement (July 1993), p. xv.

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III. The WTO Promotes Rules-Based Market Opening

A comparison of trade and protection patterns, pre- and post-GATT, illustrates the importance ofthe multilateral trading system in opening foreign markets, establishing an effective rule of law,and promoting economic growth internationally. Before the GATT, trade was highly susceptibleto changes in economic and political circumstance. Barriers appeared during WWI andworsened during the inter-war period. Since the creation of the GATT in 1948, markets havebecome increasingly open and integrated. Through eight successive rounds of negotiations,major industrial nations’ tariffs on manufactured goods have dropped by about 90 percent, somenon-tariff barriers have been brought under GATT disciplines, more sectors have been coveredmore fully by trade rules, and participation has increased nearly six fold.

To what does the multilateral trading system owe its strength? Ultimately, it is to the belief of itsmembers that their participation, including adherence to trading rules, is in their own self-interest. The WTO, which was established in 1995, reflects an agreement by each of themembers to constrain its own behavior in return for other members constraining theirs. Nationshave voluntarily agreed to such commitments because on balance they are beneficial. In makingthese commitments, nations are exercising, not giving up their sovereignty.

Moreover, the WTO has sought to strike an appropriate balance between the needs of the tradingsystem and those of individual members. The rules, such as those for resolving disputes andsetting standards, have become more transparent and predictable, but they are not whollyprescriptive. They leave considerable scope for national autonomy and diversity. The WTOAgreements do not and will not preclude the United States from establishing and maintaining itsown laws; impair the effective enforcement of U.S. laws, including laws to combat unfairimports; or limit the ability of the United States to set and achieve its environmental, labor,health, and safety standards at the levels it considers appropriate. WTO panel reports have nodirect effect on the U.S. legal system and do not change U.S. law.

For all of the reasons discussed, the United States, including its businesses, farmers, workers,and consumers, benefits substantially from trade liberalization. Though it can be difficult toseparate the effects of liberalization from those of other economic and political events, economicmodels can be used to assess some of the effects of reducing tariffs, reducing export subsidies,and eliminating quotas on countries’ trade, production, and income. Such models partiallycapture the effects of specialization and resource reallocation in goods trade, but are less adept atcapturing the effects of changes in non-quantitative rules of conduct in goods and services trade,of improvements in product selection, and of some dynamic effects. On balance, they likelyunderstate the long-term benefits of market liberalization. Moreover, as industrial tariffs inindustrial countries have been so greatly reduced, trade negotiations have increasingly focusedon services, non-tariff measures, and changes in rules whose benefits cannot be readily capturedin formal economic models. The scope of coverage of economic effects captured in thesemodels may in fact be decreasing due to the changing nature of trade agreements.

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The Trading System Provides a Framework for Liberalization

A comparison of trade and protection patterns, pre- and post-GATT, provides compellingevidence of the importance of the WTO in promoting market liberalization and an effective ruleof law.18 During the first half of the 20th Century, tariffs rose and sometimes fell, depending on anumber of factors (Figure 5). In the years preceding the GATT, markets were susceptible topolitical pressures and protectionist interests. Since the 1950s, trade has become increasinglyopen and the world economy increasingly integrated. The growth of world trade has consistentlyoutpaced the growth of world output (Figure 6).

Figure 5: Average U.S. Tariff Rates 1900-1998

0

10

20

30

40

50

60

Tariff Act of 1930(Smoot-Hawley)

Average Tariff on Dutiable Imports

Average Tariff on All Imports

Source: U.S. International Trade CommissionNote: Average tariff rates are defined as the ratio of duties collected to import values.

Creation of GATT

18 The discussion of the history of world trade in the first half of the 20th Century draws heavily from Douglas A.Irwin, “The GATT in Historical Perspective,” American Economic Review (May 1995), pp. 323-328 and Douglas A.Irwin, “The Smoot-Hawley Tariff: A Quantitative Assessment,” The Review of Economics and Statistics (1998), pp.326-334. For more on the pre-WWI period, see Irwin (1995), pp. 323-324.

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0

5

10

15

20

25

30

35

40

45

0

200

400

600

800

1000

1200

1400

1600

Source: Export and GDP data are from Angus Maddison, Monitoring the World Economy1820-1992 (Development Centre of the OECD: 1995), pp. 227 and 239. Tariff estimates are based on Stoeckel et al, Western Trading Blocs (1990), pp.7-8. Note: GDP and export data are extrapolated to 1997 using data from the World Trade Organization.

World Real Exports(right scale)

World Real GDP(right scale)

Figure 6: World Exports, GDP, and Tariff Estimates Post-WWII

Industialized Countries’ AverageTariffs(left scale)

Markets open at turn of century. At the turn of the 20th Century, international trade was‘governed’ by a loose network of bilateral treaties, subject to most-favored nation (MFN)clauses. Countries could alter their tariffs at will. For the most part, countries made use oftariffs, rather than other forms of market protection. For some countries, including the UnitedStates, tariffs were an important source of public revenue – roughly speaking, customs receiptsaccounted for about half of U.S. government revenue from 1870 through 1910. Absentinternational conflict, this trading ‘arrangement’ worked reasonably well. Data on trade andincome for the same time period suggest that markets were relatively open – for a group of 11major countries exports grew more rapidly than output.19

Trade barriers rise with onset of WWI. With the onset of WWI, some countries introducedhigher tariffs, along with import quotas and other non-tariff trade impediments. The trend didnot reverse itself after the war – countries’ border measures grew more onerous, not less. Owingpartly to the rise of protectionism, world trade collapsed. In June 1930, the U.S. Congresslegislated the Smoot-Hawley tariff to protect U.S. agriculture and other sectors. Other countriesfollowed. According to a recent study of the effects of the Smoot-Hawley tariff on U.S. importsand economic well being, the legislation led to an increase in import duties of about 20 percenton average, resulting in a 5 to 6 percent increase in the price of imports.20 Though it is difficultto separate the effects of trade policy from those of the Great Depression, the relationship 19 Irwin (1995), pp. 323-324. The 11 major countries are Australia, Belgium, Canada, France, Germany, Italy, Japan,Norway, Sweden, the United Kingdom, and the United States.20 Irwin (1998), p. 333.

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between world trade and output is revealing. Of particular note was trade’s failure to keep pacewith real output during the early stages of economic recovery – for the same group of 11countries mentioned above, output was about 15 percent higher in 1938 than in 1929, but exportswere about 15 percent lower.21 The failure of international trade to join the recovery suggeststhe significance of the rise in trade barriers.

Multilateral trading system emerges after WWII. At the end of WWII, faced with the legacy ofprotectionism, the need for reconstruction, and the specter of Communism, the United States ledthe call for an open trading system. The United States sought to secure the benefits of trade foritself and any other country willing to ‘play by the rules,’ to promote economic development inEurope and Asia, and to enlarge the scope of the market system to include as many countries aspossible. In 1947, 23 countries gathered in Geneva to reduce trade barriers; the multilateraltrading system eventually emerged from these deliberations, but other discussions of a morebroadly based International Trade Organization did not move forward. For nearly 50 years, theGATT served as both an international agreement and an international organization. Throughsuccessive ‘rounds’ of negotiations, the GATT succeeded in three important regards: First, itestablished a rules-based trading system; second, it greatly reduced the tariff rates on industrialproducts; third, it drew in new participants (Table 2).

21 Irwin (1995), p. 324.

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Years Place (Name) Subjects Covered Countries1947 Geneva Tariffs 231949 Annecy Tariffs 131951 Torquay Tariffs 381956 Geneva Tariffs 261960-61 Geneva Tariffs 26

(Dillon Round)

1964-67 Geneva Tariffs and anti-dumping 62(Kennedy Round) measures

1973-79 Geneva Tariffs, non-tariff measures, 102(Tokyo Round) and plurilateral “framework”

agreements (also referred to as “codes”)

1986-94 Geneva Tariffs, non-tariff measures, 123(Uruguay Round) new rules for services,

intellectual property rights, textiles and clothing, and agriculture; creation of the WTO and strengthening of the dispute settlement mechanism

Source: The World Trade Organization, “Roots: from Havana to Marrakesh,” http://www.wto.org/about/facts4.htm (downloaded September 19,1999)

Table 2: Eight Rounds of GATT Negotiations

______________________________________________________________________________

• Rules promote fair and open trade. Consistent with U.S. goals for an open trading system,the GATT was founded on principles of consensus, reciprocity, and non-discrimination – allparticipants were granted MFN status and their products accorded national treatment. Anyconcession granted to one partner would be granted to all partners and, upon entry into acountry, all products would be treated the same regardless of their origin. The same basicprinciples now apply generally to WTO members.

• Industrial tariffs decline dramatically. At the end of WWII, the average tariff on industrialproducts in developed countries was about 40 percent. The Geneva negotiations of 1947involved 23 countries and resulted in 45,000 tariff concessions, affecting about one-fifth of

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the world’s trade.22 By the 1950s, industrial tariffs in developed countries averaged roughly25 percent.23 Later rounds in Annecy, Torquay, and Geneva led to further reductions. By thelate 1960s, the average tariff on industrial products in developed countries fell to about 12percent. By the end of the Uruguay Round phase in, the average will be 3.8 percent.

• Participation increases nearly six-fold. Over time, the multilateral trading system hasbecome increasingly attractive to a widening range of participants. It has helped maintainstable trading relationships in the face of economic and political changes. The system hasprovided a forum to engage the EU and draw in developing, newly industrializing, andtransition economies. In 1947 there were only 23 “contracting parties.” By the mid-1960s,participation had risen to 62 countries. The Tokyo Round of the 1970s involved 102participants and the Uruguay Round involved 123 participants; both of these rounds includedmany developing countries. More and more countries have been able to reap the benefits ofopen markets through outward-oriented development strategies. Today, the WTO claims 135members and another 32 nations are seeking accession.24

Recent Negotiations Further U.S. Policy Objectives

Through the 1960s, the GATT focused on reducing industrial tariffs. In this regard it was quitesuccessful, but the 1970s gave way to new and additional protections, including quotas,voluntary export restraints, and other non-tariff measures. Moreover, some important sectors,such as services and agriculture, remained largely uncovered. Thus, the GATT began to turn itsattention to non-tariff measures, sectoral expansion, and, to lesser extent, institutional reform.The Tokyo Round made less progress than some might have hoped, but laid the groundwork formore successful negotiations in the Uruguay Round. Although the Tokyo Round failed to bringagriculture into the GATT, it gave rise to plurilateral agreements or “codes” in some areas,including subsidies, standards, import licensing procedures, and government procurement. Inmany other regards, the GATT was also falling behind the times. Trade in services and theprotection of intellectual property rights were becoming increasingly important in the globaleconomy, but the GATT lacked adequate treatment of either issue. The Uruguay Round madesignificant gains in many of these areas, thus helping to usher in a new era in international trade.

Uruguay Round opens markets and strengthens rules. The Uruguay Round brought moresectors more fully into the multilateral trading system, strengthened the rules of internationaltrade, and established the WTO in 1995 (Appendix). The Uruguay Round brought agricultureand textiles and clothing more fully into the GATT and took ‘first steps’ toward liberalizingtrade in those sectors. The Uruguay Round also created the WTO, with its separate agreementson services and intellectual property, a more effective dispute settlement mechanism, and a‘built-in agenda’ to promote liberalization between formal rounds.25 Beginning in 1995, the

22 See the World Trade Organization, “Roots: from Havana to Marrakesh,” http://www.wto.org/about/facts4.htm(downloaded September 19, 1999 and last updated January 14, 1998).23 Andrew Stoeckel, David Pearce, and Gary Banks, “Western Trade Blocks: Game, Set or Match for Asia-Pacificand the World Economy?” (Centre for International Economics, Australia: 1990), pp. 7-8.24 The 135 members include Estonia, which joined the WTO on November 13, 1999.25 Some of the Uruguay Round Agreements set timetables for future work, including new negotiations in some areasand assessments of the situation at specified times in others. See, the World Trade Organization, “About the WTO,Beyond the Agreements,” http://www.wto.org/about/beyond2.htm (downloaded September 19, 1999).

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GATT no longer acts as an international organization – in this capacity it has been replaced bythe WTO – though it still remains as an agreement on trade in goods. Under the auspices of theWTO, the GATT now stands next to the General Agreement on Trade in Services (GATS) andthe Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS). Under theDispute Settlement Understanding (DSU), a single dispute settlement procedure covers disputesamong all WTO members pertaining to the WTO’s multilateral agreements.

Many key accomplishments of the Uruguay Round play directly to U.S. policy objectives andeconomic strengths. The United States has long recognized the importance of a credible rules-based system, both to open foreign markets and to spread the gains from trade as widely aspossible. The Uruguay Round of negotiations moved much further toward creating such asystem. The United States is also a leader in many areas, including high-tech manufacturing,agriculture, and services, which stand to benefit from the WTO Agreements and ongoingnegotiations under the built-in agenda.

Post-Uruguay Round negotiations continue process. The built-in agenda called for furthernegotiations in agriculture and services and additional work in many areas. To date, post-Uruguay Round negotiations have yielded market access commitments in financial services,basic telecommunications services, and information technology, opening up new opportunities inareas in which the United States is highly competitive.26

• Financial services. On December 13, 1997, 70 WTO members concluded negotiations onfinancial services. They agreed to the broad liberalization of their banking, securities,insurance, and financial data services sectors. Based on recent estimates, the commitmentsapply to about $18 trillion in global securities assets, $38 trillion in global bank lending, andabout $2.2 trillion in worldwide insurance premiums. This brought to 102 the total numberof WTO members with financial services commitments.

• Basic telecommunications services. On February 15, 1997, the United States and 69 otherWTO members concluded negotiations on basic telecommunications services, such astelephone services. The agreement commits countries to provide market access and nationaltreatment to service suppliers from other WTO members. Sixty-five countries also agreed toa set of specific pro-competitive regulatory principles. The agreement eliminates certainrestrictive practices in countries that account for 95 percent of world telecommunicationsrevenues, amounting to about $600 billion in 1996.

• Information technology. On March 26, 1997, 40 countries agreed to eliminate import dutiesand other charges on information technology products, mostly by 2000. Since that time, thenumber of participants has grown. The agreement covers global information technologyproducts such as semiconductors, telecommunications equipment, computers and computerequipment, and software. Participants account for over 90 percent of trade in this sector.

26 Summary of results from the Economic Report of the President (1998), pp. 224-226, and from the World TradeOrganization, http://www.wto.org/about (downloaded September 19, 1999). Discussions also continued on “themovement of natural persons,” i.e., the entry and temporary stay of persons for the purpose of providing services,and on maritime transport services. The former discussions were completed in July 1995, achieving modest results,while the latter were suspended.

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Countries Gain from Lower Barriers

The Uruguay Round continued the focus of the GATT on tariff reductions, and extendedagreements to previously neglected sectors, such as agriculture, textiles and clothing, andservices. Substantial breakthroughs were achieved in new areas, such as trade-related aspects ofintellectual property rights. Moreover, the creation of the WTO provides an improvedinstitutional framework for resolving disputes and monitoring countries’ performance in thetrading system. While benefits are expected from each of these accomplishments, numericalassessments are limited to certain conceptually quantifiable features of the round, namelyreducing tariffs, reducing export subsidies, and eliminating quotas on some industrial products,textiles and clothing, and agricultural products.27 The assessments do not capture the gains fromstrengthened rules, such as those found in the dispute settlement procedure and the newagreements on services and trade-related aspects of intellectual property rights. Nor do theycapture short-term adjustment costs. 28 Although restricted in scope, these assessments provideestimates of some of the potential benefits of the Uruguay Round.29 They also provide insight asto the distribution of effects across countries and across industries within countries.

Recent studies evaluating a narrow range of the potential gains from the Uruguay Round,estimate that annual global income could rise by 0.7 to 0.9 percent or $171 billion to $214 billionupon full implementation, in 1992 dollars.30 Most of these studies show gains accruing primarilyto developed countries, perhaps not surprisingly, because many of their commitments are moredirectly quantifiable. For the United States, the annual gains could be about 0.4 to 0.6 percent ofGDP, amounting to about $27 billion to $37 billion in 1992 dollars. These studies also show thatsome developing countries stand to gain significantly, especially relative to the size of theireconomies. Although the projected gains for many OECD countries, including the United States, 27 Even in this regard the assessments suffer considerable limitations. None fully depicts all sectors of the U.S. orglobal economies. In particular, they provide more stylized representations of some of the manufacturing sectors inwhich the United States is highly competitive. This kind of “aggregation bias” may significantly understate thebenefits of the agreement to the United States. See Hugh M. Arce and Kenneth A. Reinert, “Aggregation and theWelfare Analysis of US Tariffs,” in Journal of Economic Studies, Vol. 21, No. 6 (1994), pp. 26-30.28 As noted previously, a 1994 study estimated that about 0.2 percent of U.S. work force could change jobs as aresult of changes in patterns of trade. See Susan M. Collins and Barry P. Bosworth, p. 2.29 The discussion below draws from the most recent revisions of four published models. These revisions, based onthe actual commitments made by the countries in the negotiations, tend to project slightly lower gains thanpreviously expected. See Ian Goldin and Dominique van der Mensbrugghe, “Assessing Agricultural Tarifficationunder the Uruguay Round,” Thomas Hertel, Will Martin, Koji Yanagishima, and Betina Dimaranan, “LiberalizingManufactures Trade in a Changing World Economy,” Glenn W. Harrison, Thomas F. Rutherford, and David G.Tarr, “Quantifying the Uruguay Round,” and Joseph F. Francois, Bradley McDonald, and Håkan Nordström, “TheUruguay Round: A Numerically Based Quantitative Assessment,” in The Uruguay Round and the DevelopingCountries, Will Martin and L. Alan Winters, eds. (World Bank and Cambridge University Press, U.K.: 1996), pp.156-291. The models differ in many respects, including the base periods chosen, parameter assumptions, and theagreements emphasized (for example, Goldin et al. focuses on agricultural liberalization, while Hertel et al.emphasizes textile and clothing liberalization). As a result, the estimates are not fully comparable.30 See Harrison et al., p. 238 and Francois et al., pp. 282-283. These estimates are from dynamic simulations,incorporating increasing returns to scale and imperfect competition in their representations of the U.S. and globaleconomies and using 1992 as the benchmark for comparison. The dollar figures show gains relative to U.S. andglobal income in 1992 in 1992 dollars. With static specifications, the liberalization of trade in goods is estimated toinduce an annual gain in the range 0.2 to 0.4 percent of global income, or $40 billion to $99 billion. While thedynamic simulations may be more realistic than their static counterparts, they include features that are also moredifficult to characterize accurately.

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amount to less than one percent of their respective national incomes, the gains for several smallercountries, such as Thailand, Malaysia, and Philippines, could be as much as ten percent or moreof their respective national incomes.31 Some least-developed countries could be affectedadversely in the short run, but possible negative impacts could be offset partially if they were tofurther reduce their own trade barriers. Additional liberalization could also bring more rapidgrowth and enhance technology transfers. Sectoral estimates vary widely:

• The annual benefits of the Agreement on Agriculture could amount to $5 billion to $68billion.32 Most of the studies show benefits accruing to OECD countries, including theUnited States, and to some upper-income developing countries. Though a significant ‘first-step,’ the major achievement in the Agreement on Agriculture is more in bringing the sectorinto the GATT framework than in actual liberalization.

• The annual benefits of the Agreement on Textiles and Clothing (ATC), obtained throughabolishing the multi-fiber arrangement (MFA), could amount to $20 billion to $118 billion.33

The United States and EU would derive substantial gains from eliminating the MFA quotarestrictions, mainly because their consumers and firms using imported products as inputs seesignificantly lower prices. The effects on other countries are mixed.

• The annual benefits of Uruguay Round liberalization of industrial products, excludingtextiles and clothing, could amount to $59 billion to $87 billion.34 The benefits ofliberalization in this sector are more evenly distributed among developed and developingcountries than in the cases of the Agreement on Agriculture or the ATC.

Taking a slightly different approach, estimates of the benefits of trade liberalization can also bederived from analyses of the costs of protection. For example, a study of the costs of protectionin the United States finds that tariffs and quantitative import restrictions in place in 1990 costAmerican consumers about $70 billion, over 1 percent of GDP.35 The net welfare loss, afterdeducting tariff revenues and transfers to domestic producers was $11 billion.

31 See Hertel et al., p. 203 and Harrison et al., p. 237.32 See Goldin et al., p. 170, Harrison et al. p. 238, and Francois et al., pp. 282-283.33 See Harrison et al., p. 238 and Francois et al., pp. 282-283.34 Ibid.35 See Gary Clyde Hufbauer and Kimberly Ann Elliot, Measuring the Costs of Protection in the United States(Institute for International Economics, Washington, DC: 1994). Returning to the earlier discussion of the Smoot-Hawley tariff, quantitative assessments suggest that the tariff accounted for about 7 percent of the 40 percent declinein imports in the two years after the legislation took effect. However, less is known about the associated loss ofeconomic welfare. Estimates of the effects of the Smoot-Hawley tariff on U.S. income range from less than $5million in a partial equilibrium economic model to $60 billion to $460 million in general equilibrium models, allmeasured in terms of 1929 dollars and amounting to less than 1 percent of GNP. See Irwin (1998), pp. 331-333.These figures do not, however, account for the added effects of the similar actions taken by other trading nations.

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New Rules Convey Additional Benefits

Among its most significant accomplishments, the Uruguay Round greatly strengthened the rulesof international trade. Good governance, i.e., an effective rule of law, is essential. The promiseof market liberalization for U.S. businesses, farmers, workers, and consumers, hinges cruciallyon transparency and predictability. For example, if U.S. businesses lack certainty that theirproducts will be treated fairly in foreign markets, they may weigh the risks and opt against them,choosing to forgo opportunities for expansion. If intellectual property rights are ambiguous, U.S.businesses may hesitate to trade in products that are “knowledge-based.” In effect, they may notchoose to specialize in the things they do best. Or, they may limit their sales to domestic marketsand affiliates. As a result, the U.S. economy may not reap the full benefits of trade. In theseways, the multilateral trading system is more than “just” a trading system – it is a system of rulesthat positively impacts business decisions and standards of living.

More specifically, the Uruguay Round introduced new rules for agriculture, textiles and clothing,services, intellectual property, and dispute settlement, and other areas. Some of the rules werequantitative, such as those requiring reductions in tariffs on certain agricultural products. Theywere discussed previously. Others were not, such those pertaining to national treatment forservices and protection for intellectual property rights. As noted above, economic models oftenhave difficulty capturing the direct economic benefits of non-quantitative changes, but carefulobservation provides evidence of their importance. The discussion below highlights three suchareas, dispute settlement, and services, and intellectual property.

Dispute settlement process improves. The DSU improves on GATT dispute settlementproceedings by expediting decision making and instituting an appeals process.36 It alsoestablishes procedures to ensure consequences for failure to implement panel rulings. One is theacceptance of cross-sector suspension of concessions for countries that choose not to abide bythe ruling. Note here, that the procedure presents each member with a choice. A WTO disputesettlement panel cannot force the United States, or any other member, to change its laws. Onlythe United States determines exactly how it will respond to the recommendations of a WTOpanel, if at all. If a U.S. measure is found to be in violation of a WTO provision, the UnitedStates may decide on its own to change the law; compensate a foreign country by lowering tradebarriers of equivalent amount in the same or another sector; or do nothing and possibly faceretaliation by the affected country in the form of increased barriers to U.S. exports. The UnitedStates retains full sovereignty in its decisions as do all other WTO members.

At times, however, the results may be disappointing, as in the recent case of the EU bananaimport regime. The WTO panel found favorably for the United States, concluding that the EUimport regime was not WTO-consistent, but the recommendation did not bring about asatisfactory change in EU policy. In this instance, the WTO arbitrators found that the UnitedStates was being harmed in the amount of $191.4 million annually and accordingly couldsuspend trade concessions equivalent to that amount. The United States did so by imposing 100percent ad valorem duties on a range of products, including bath preparations, handbags, and bed

36 Portions of this discussion are drawn from the Economic Report of the President (1998), pp. 223-224. They havebeen modified to include new data from the Office of the U.S. Trade Representative.

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linens. Nevertheless, in the nearly five years since its institution, many countries, including theUnited States, have made efficient use of the new mechanism, largely to their satisfaction.

The introduction of a strengthened multilateral dispute settlement system in the WTO, togetherwith the Agreement on Agriculture, the GATS, and the TRIPS Agreement, has broadened thescope of enforcement tools available to the United States. In the 1980s, the United States had noeffective dispute settlement mechanism available to address problems in the areas of intellectualproperty, services, and agriculture, which the GATT covered barely or not at all. Beginning in1995, however, the DSU and the new WTO rules have permitted the United States to usemultilateral dispute settlement procedures to address the majority of issues that face U.S.exporters. For example, trade in agriculture and intellectual property has featured prominentlyon the U.S. roster under the DSU.

The results of 49 complaints filed by the United States suggest that the dispute settlementprocess has proved effective. The United States has prevailed in 22 out of 24 cases so far,having favorably settled in 10 cases without litigation and having won in 12 cases in litigation.37

Only two of the 12 cases, those relating to the EU banana and beef import regimes, resulted inretaliatory measures. Six cases are still pending before dispute settlement panels and 17 are stillin the consultative phase or otherwise inactive.38 The United States has used the disputesettlement process to address conflicts with a variety of countries, the majority of which aremajor trading partners. Of the 49 complaints filed by the United States, 20 involved the EU andaffiliates, 5 involved Japan, 5 involved Korea, 3 involved Canada, 3 involved India, 2 involvedAustralia, and the remainder involved others.

Services agreements provide first steps toward potential gains. The U.S. services sector hasgrown substantially, in terms of both U.S. income and exports. Private and public services,including travel, transportation, retailing, advertising, insurance, accounting, engineering, andeducation, accounted for 53 percent of U.S. GDP in 1998, compared with 32 percent in 1950(Figure 7). Over time, the share of services in total U.S. exports has also increased. Private andpublic services accounted for about 29 percent of U.S. exports in 1998, compared with about 17percent in 1950. (During the same period, however, the share of services in U.S. imports wasmostly declining or flat.) In 1998, the United States accounted for 18 percent of all commercialservice exports, ranking first in the world.39 Roughly speaking, the data are consistent with theview that the service sector is one in which the United States enjoys a comparative advantage.40

Taken together, the data suggest U.S. services exporters, and possibly some importers, stand tobenefit from continued market liberalization.

37 The United States did not prevail in two matters, one of which involved three separate complaints.38 Of the 33 complaint brought against the United States, 10 were settled “out of court,” 5 were lost in litigation, 7are in panel or appellate phase, and 11 are still in consultations or otherwise inactive.39 World Trade Organization, http://www.wto.org/wto/statis/prerelease.htm (downloaded November 11, 1999).40 See Catherine L. Mann, Is the U.S. Trade Deficit Sustainable? (Institute for International Economics, Washington,DC: September 1999).

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Service Production as Percent of GDP

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Source: U.S. Department of Commerce, Bureau of Economic AnalysisNote: Data prior to 1959 are not subject to October 1999 data revision.

Recent data on trade in private services alone point to potential areas of gain from GATS andfurther negotiations. Between 1994 and 1998, total U.S. exports of private services rose fromabout $186 billion to about $246 billion, growing on average by about 7 percent annually.41

Within this category of trade, U.S. financial service exports increased by about 24 percentannually, U.S. insurance service exports increased by about 14 percent annually, and U.S.business, professional, and technical service exports increased by about 12 percent annually.U.S. exports of royalties and license fees grew by about 8 percent annually, just ahead of thesectoral average. U.S. exports of financial services and insurance grew much more rapidlybetween 1994 and 1998 than between 1986 and 1994, the period in which the Uruguay Roundwas negotiated. By contrast, U.S. exports of business, professional, and technical services androyalties and license fees slowed somewhat in the later period.42

U.S. private service imports increased more rapidly in the later period than did U.S. privateservice exports, but from a smaller base – they grew from about $119 billion in 1994 to about$165 billion in 1998, at an average annual rate of almost 9 percent. Here, the top gainers werefinancial services which increased by about 23 percent annually, business, professional, and

41 All cited growth rates are derived from nominal trade figures.42 The annual growth rate in U.S. exports of all private services was somewhat lower in the post-Uruguay Roundperiod, 7 percent between 1994 and 1998, than in the pre-Uruguay Round period, 12 percent between 1986 and1994. The growth in U.S. exports of goods also slowed in the later period, increasing by 8 percent annually between1994 and 1998, compared with 11 percent annually between 1986 and 1994.

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technical services, which increased by about 19 percent annually, and royalties and license fees,which increased by about 18 percent annually.43

Intellectual property rights convey substantial value. The WTO describes intellectual propertyrights as “the rights given to persons over the creations of their minds.” Such creations havehelped contribute to the success of the U.S. economy. A recent study conducted by the OECDreports that knowledge-based industries and services (including community, social, and personalservices; finance, insurance, and other business services; communications services; high-technology manufactures; and medium-high-technology manufactures) accounted for over 50percent of the value added in the U.S. business sector in 1996.44 The United States rankedsecond only to Germany in this regard. Another recent study finds that corporate patent activityin 1995 reflected U.S. technological strengths in developing new medical and surgical devices,electronics, telecommunications, advanced materials, and biotechnology.45 Strong intellectualproperty protection – and enforcement – helps spur innovation, by providing assurances that U.S.businesses and inventors will reap the benefits of their research and development.

Though only one indicator among many, data on U.S. trade in royalties and license fees helpillustrate the importance to U.S. businesses of protecting intellectual property rights.46 In 1998,U.S. exports of royalties and license fees, deriving from industrial processes, books, records,tapes, broadcasting and recording of live events, franchise fees, trademarks, and other sources,amounted to about $36.8 billion, accounting for about 15 percent of all U.S. private serviceexports (Figure 8). This share has increased over the past decade – U.S. exports of royalties andlicense fees have more than tripled in nominal terms, thus outpacing the growth in U.S. privateservice exports overall. However, as noted above, the growth in U.S. exports of royalties andlicense fees has slowed somewhat in recent years. The growth in U.S. imports of royalties andlicense fees has also outpaced the growth in U.S. private service imports overall – but in thiscase, still accounting for a relatively small share of the total. In 1988, U.S. imports of royaltiesand license fees totaled about $2.6 billion and accounted for about 3 percent of all U.S. privateservice imports; in 1998, they totaled about $11.3 billion and accounted for almost 7 percent ofall U.S. private service imports.

43 For the most part, the annual growth rates between 1994 and 1998 exceeded those between 1986 and 1994. Theannual growth rate in U.S. imports of all private services was also higher in the post-Uruguay Round period, almost9 percent between 1994 and 1998, compared with about 8 percent between 1986 and 1994.44 See Organization for Economic Cooperation and Development, OECD Science, Technology and IndustryScoreboard 1999, Benchmarking Knowledge-Based Economies (1999), p. 19.45 See the National Science Board, Science and Engineering Indicators–1998, Arlington, VA, National ScienceFoundation, 1998 (NSB 98-1), pp. 6-21 and 6-22.46 For more on U.S. trade in royalties and license fees, see the National Science Board, pp. 6-14 to 6-16.

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Figure 8: U.S. Exports of Royalties and License Fees 1986-1998

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Source: Survey of Current Business , July 1999, U.S. Department of Commerce, Bureau of Economic Analysis, p. 85

Patent data, which provide a rough indicator of national ‘inventiveness,’ also help illustrate theimportance of intellectual property rights protections. Not surprisingly, the number of patentsawarded annually to U.S. firms and individuals is also increasing. Over a 13-year period, from1982 to 1995, the number of patents issued annually by the U.S. Patent and Trademark Officegrew from under 60,000 to over 100,000, with more than half of the patents granted in each yeargoing to U.S. inventors.47 Moreover, U.S. inventors have also been active in neighboring andsome faraway markets. U.S. inventors received more patents in Mexico than did other non-Mexican inventors and they received more patents in Canada than did other non-Canadianinventors. They also out-paced other foreign inventors in some more distant markets, such asJapan, Brazil, Hong Kong, India, Malaysia, and Thailand.48

47 Ibid., pp. 6-19.48 Ibid., pp. 6-22 and 6-23.

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IV. The WTO Extends the Benefits of Trade and Encourages Growth

U.S. trade policy has long sought to use the trading system to help promote economicdevelopment. Trade is often described as an ‘engine of growth.’ The weight of the evidence,including both historical insight and statistical indicators, supports this view. For example, thecorrelation between outward orientation and growth suggest a mutually supportive relationship(Figure 9). Data from 1974-1985 and 1986-1992 show developing countries with inward-oriented economic policies experiencing less annual growth of GDP per capita than those withoutward-oriented economic policies. In the later period, the differences in growth patterns areeven more apparent. Moreover, a rules-based system that creates incentives for countries toadopt transparent policies and procedures can also help further the development process.

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Figure 9: Annual Growth of Real GDP Per Capita in Selected Developing Economies

As evidence of its appeal, the multilateral trading system has grown substantially since itsfounding. Today, the WTO claims 135 members, including over 100 developing countries,compared with only 23 contracting parties in 1948. Since 1995, seven new members have joinedthe WTO – Bulgaria, Ecuador, Estonia, Kyrgyzstan, Latvia, Mongolia, and Panama – andanother 32 nations are seeking accession. However, not all WTO members are well positionedto make use of these opportunities. Some, especially the least developed among them, lack thenecessary institutions and infrastructure to reap the full benefits of the multilateral system.

The United States has a strong interest in promoting economic development internationally for acombination of humanitarian, political, and economic reasons. Among these reasons is our own

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self-interest. Growth abroad creates demand for our exports and yields new sources of inputs forU.S. manufactures. In doing so, it promotes growth in the United States. Thus, we have a directinterest in seeing our trading partners prosper. This means that a multilateral system thatpromotes trade is beneficial, not only because it enhances economic development abroad, ashistory seems to suggest, but also because it is good for us. Consistent with this view, the UnitedStates has long sought to extend the benefits of trade as widely as possible.

The Multilateral Trading System Provides Opportunities for Growth

Historical insight supports the view that the multilateral trading system facilitates trade, therebyproviding an engine of economic growth. The experience of the United States, parts of Europe,and Japan after WWII, as well as the emergence of the Asian Newly Industrializing Economies(NIEs) in the 1970s, provide evidence. The multilateral trading system can also help advance theeconomic development process by creating incentives for members to adopt more transparentpolicies and procedures.

Trade fuels post-WWII reconstruction and growth. The period following WWII was anextremely prosperous period for much of the world, including the United States, Japan, and partsof Europe. It was a period in which Japan and the developed countries of Europe were able toapproach America’s rising productivity levels. There are many possible reasons for thisprosperity, but commonly cited among them is the creation of a more open trading system. Thistrading system allowed outward-oriented Japan and parts of Europe to enjoy the kind of scaleeconomies that previously only the United States could enjoy, with the strength of its domesticmarket. But their development did not come at the expense of the United States. The post-WWII era was also a period of rapid growth for the U.S. economy.

Trade also contributes to economic development. In the early 1970s, growth slowedsubstantially in the United States and much of the world. However, growth remained strong inthe Asian NIEs and other outward-oriented Asian economies. Although there is some debate asto the source of their growth, many have argued that their outward orientation played a majorrole. Now, some of these economies are among our major trading partners. In 1998, Korea,Singapore, Hong Kong, and Taiwan accounted for a combined total of about 9 percent of U.S.merchandise exports and imports. Moreover, economic evidence suggests that as theseeconomies grew, their workers generally shared in the gains.49

The multilateral trading system promotes good governance. As the history of the GATTdemonstrates, the United States has long advocated the use of the multilateral trading system topromote economic development internationally. It has also sought to establish strong democraticinstitutions and to spread the ‘rule of law,’ not just in the trading system per se but, moregenerally, throughout the world. The new dispute settlement system has advanced the rule oflaw, by allowing the WTO to enforce trading rules more effectively. But other aspects of theWTO can help further this objective. By requiring transparency in its procedures andestablishing new rules for transparency in government procurement, the WTO can help promotegood governance worldwide. For these reasons, the United States has aspired to extend the

49 See U.S. Congressional Budget Office, “Promoting Worker Rights in Developing Countries: U.S. Policies andTheir Rationale” (April 1997), p. 16.

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benefits of trade as widely as possible, both across and within countries, by opening WTOmembership to any country willing to ‘play by the rules.’

The Full Realization of Benefits Requires Further Integration

Today, developing countries account for over three-quarters of the WTO’s membership. Theirrole in the trading system changed significantly in the Uruguay Round. Many were active innegotiations, helping to bring agriculture more fully into the GATT and to reach agreement onphasing out the MFA. As discussed previously, trade can enhance countries’ growth prospects,as evidenced by Japan and parts of Europe in the post-WWII period and, more recently, theAsian NIEs. Currently, the developing countries stand to gain from further liberalization of tradein agriculture, services, and industrial products. Trade in high-tech manufactures and services,along with associated knowledge transfers, offers potential for developing countries, includingthe least developed, to enter the global economy more rapidly and effectively. The developingcountries would gain not only from more trade with industrialized countries, but also fromincreased trade among themselves. An important next step in the next round should be to ensurethat more members of the global community are able to benefit more fully from participation inthe multilateral trading system and from adoption of outward-oriented trade regimes.

Active participants move ahead. By and large, developing countries have come to account foran increasingly large share of world trade, but some have moved ahead faster than others.Overall, exports plus imports of developing countries rose at an annual rate of 9.9 percentbetween 1989 and 1997, exceeding the 7.6 percent growth rate of world trade.50 Of thedeveloping country total, the trade of WTO members grew slightly faster, at an annual rate of10.5 percent. However, the 48 least developed countries have to some extent been left behind.For these countries, trade grew at an annual rate of 6.1 percent (through 1996). Some of thesecountries have difficulty participating fully in the world trading system even if they are WTOmembers – often because of lack of adequate domestic institutions and infrastructure.

Capacity building, technical assistance, and liberalization could help spread benefits. Theinternational community, including all WTO members, can do more to help spread the benefitsof participation in the global economy. Efforts should address the specific needs of developingcountries, especially the least developed, but there are overall principles that can offer substantialassistance to most. First, many of the poorest countries lack capacity to implement effectivelytheir WTO obligations in a number of areas. Through the WTO, the international communitycan focus on offering capacity building and technical assistance to those countries, as well as onmaking more progress in further liberalization in priority areas, such as agriculture and services.In addition, the developing countries can take their own actions. They would benefit fromcontinued unilateral and bilateral liberalization, as significant gains can be derived fromincreased South-South trade in addition to North-South trade.

50 Numbers cited here are derived from Constantine Michalopoulos, “Trade Policy and Market Access Issues forDeveloping Countries,” unpublished draft (September 1999), pp. 4-5 and exclude intra-EU trade. The developingcountry category is based on the WTO statistical classification with South Africa included and Israel excluded.

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V. The U.S. Agenda Meets the Challenges of the 21st Century

The United States is able to look to the future – and a new round of multilateral tradenegotiations – from a position of economic strength. The U.S. economy is enjoying anunprecedented period of expansion and performance. It is experiencing revolutions ininformation technology and biotechnology. It is highly competitive over a wide range ofactivities in agriculture, services, and industry. U.S. farmers have long been among the world’smost productive. U.S. manufacturers have restored much of the competitiveness that had, insome cases, eroded in the 1980s in both basic and high-tech industries. U.S. firms continue tolead in business, financial, and other private services. To reach its fullest potential, however, theUnited States continues to have an interest in improving its access to foreign markets,strengthening the operation of the WTO system of rules, and promoting the growth anddevelopment of foreign economies.

Much Remains to Be Done

Many foreign governments continue to allow or impose high tariffs and burdensome rules onimports; many also maintain trade-distorting domestic subsidies. Agriculture provides a starkexample. Bound tariff rates on agricultural products average about 50 percent around the worldcompared with less than 10 percent in the United States.51 Moreover, even after the UruguayRound commitments are implemented fully, the EU and Japan will be able to provide as much as$78 billion and $35 billion, respectively, of trade-distorting domestic support to their farmerseach year.52 By comparison, the United States will be limited to about $19 billion. Partlybecause of these policies, average food and related prices are 34 percent higher in the EU and134 percent higher in Japan than they are in the United States (Figure 10). Many foreign barriersto trade also remain in the services sector.

51 Data from the U.S. Department of Agriculture, Foreign Agricultural Service (July 1999).52 Data from the U.S. Department of Agriculture, Foreign Agricultural Service (November 1999).

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In addition, the rules of the WTO and the manner in which they are enforced have room forimprovement. Many commitments negotiated in the Uruguay Round have yet to beimplemented, in part because some members lack the technical capacity to do so. In someinstances, the system’s operation remains hidden from public scrutiny to a degree which impedespublic confidence and support. The dispute settlement process, in particular, while muchimproved in the Uruguay Round, remains opaque and sometimes slow to deliver effectiveresolution. For a credible system it is not sufficient for justice to be done, it must also be seen tobe done. The system should also be seen to enhance the benefits it brings by supporting corelabor standards and environmental objectives; in doing so, it would broaden support among somewho remain skeptical about open trade.

The Uruguay Round negotiations were protracted – lasting from 1986 to 1994 – and even aftertheir conclusion, much of the agenda was not completed. The next round should be designed toproduce results much faster, both to provide new and additional benefits sooner and to keep pacewith change. For this reason, the United States has proposed a three-year deadline forcompleting the next round.

Probably the greatest challenge is to ensure that the least developed economies emerge and thatthe emerging economies are integrated into a global system that promotes economic growth.Although the United States still tends to trade most often with other developed or neighboringeconomies, its trade with developing countries is already important and holds great promise forthe future – non-OECD countries account for about 33 percent of U.S. imports and about 29

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percent of U.S. exports. This U.S. interest in sustained economic development abroad has beenunderscored by the financial crises that have affected many developing countries over the pasttwo years. The slump in growth associated with the crisis has constrained U.S. exports andcaused considerable disruption in imports. While the source of these problems has beenmacroeconomic and financial, the resolution has included trade. In addition, the need for tradingrules has been underscored by the problems engendered by insufficient transparency.

U.S. Objectives for Seattle and Beyond

The United States is committed to expanding the circle of nations that benefit from trade andputting a “human face” on the global economy. As such, U.S. proposals reflect key interests inopening foreign markets, strengthening the rule of law, and promoting economic development.The United States is proposing to launch a new round that includes a broad-based market accessagenda, focusing on services, agriculture, and industrial tariffs, and lasting no more than threeyears. The WTO’s built-in agenda calls for further negotiations on agriculture and services,beginning no later than December 31, 1999 and January 1, 2000, respectively. In agriculture, forexample, the United States is seeking to eliminate export subsidies, reduce tariffs and trade-distorting domestic supports, and ensure that trade in agricultural biotechnology products isbased on transparent, predictable, and timely processes.

The United States is also seeking immediate tariff cuts in eight key areas, agreement ontransparency in government procurement, extension of the prohibition on e-commerce duties,and an agreement to make additional information technology products tariff free. The UnitedStates sees a need to strengthen the WTO’s relationships with other international organizationsand for reforms to make the WTO itself more open and accessible.

• The United States is seeking accelerated tariff liberalization in eight key areas – chemicals,energy products, environmental products, fish, forest products, jewelry, medical andscientific equipment, and toys. These areas account for $198 billion of U.S. exports.

• The United States, together with South Korea and Hungary, has proposed a worldwideagreement on transparency in government procurement to promote good governmentpractices. Such practices reduce the potential for bribery, corruption, and other insider deals.Adoption of this proposal would provide all nations with more opportunity to sell their goodsand services in the $3.1 trillion government procurement market.

• In 1998, WTO Ministers agreed to a temporary prohibition on duties on electroniccommerce. The United States is seeking an extension of the prohibition to ensure thecontinued growth of the high-technology sector, to ensure that no WTO members takeactions to inhibit the growth of e-commerce, and ensure that developing countries benefitfrom the expansion of e-commerce.

• The United States has highlighted the need to make the WTO more open and moreaccessible. To achieve this goal, the United States has proposed opening the disputesettlement procedures to the public, allowing non-governmental organizations (NGOs) to fileamicus curiae briefs in cases involving the environment, and creating institutional structures

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to increase consultations with NGOs. The United States also sees the need to strengthen theWTO’s institutional relationships with other international organizations, beyond the BrettonWoods institutions, to include the International Labor Organization and UN EnvironmentalProgram (UNEP) for example.

The United States has sought to create a trading system that spreads the benefits of trade aswidely as possible, both across and within countries, and is supportive of core labor standardsand the environment. To that end, the United States is:

• Seeking to bring more nations into the open trading system and ensure that developingcountries fully benefit from the system. The United States will work to give the leastdeveloped countries greater access to global markets. The United States is also proposingmeasures to provide technical assistance on implementing trade policy and strengtheninginstitutions in developing countries responsible for trade, labor, environmental, and otherpolicies that influence the gains to living standards from trade.

• Proposing to establish a WTO Working Group on Trade and Labor in Seattle, strengthen theILO, and enhance the institutional links between the ILO and the WTO, by granting the ILOobserver status at the WTO, similar to that enjoyed by the World Bank and others.

• Pursuing opportunities that can open markets and yield environmental benefits, such aseliminating fishery subsidies that contribute to over-fishing and eliminating tariffs onenvironmental goods; and seeking to strengthen cooperation between the WTO andinternational organizations dealing with environmental issues like UNEP.

• Committing to conduct a U.S. environmental review of the likely consequences of the Roundand proposing that the WTO Trade and Environment Committee help identify environmentalimplications as the Round proceeds.

Much of the recent debate about trade has been carried out in extreme and sterile terms. Tradeliberalization is sometimes promoted by those who see no costs and opposed by those who seeno benefits. The truth is that trade can provide benefits, on balance, but it can – like any othersource of growth – also impose costs. A key challenge for policy is to implement thecomplementary policies that help compensate and aid those who are hurt. Likewise, membershipin the WTO is sometimes advocated as if it imposes no constraints and it is sometimeschallenged as an unwarranted invasion of our sovereignty. The truth is, however, that we doagree to constrain our behavior by agreeing to adhere to the rules of the trading system. Ourmembership in the WTO is advantageous not because it entails no obligations, but because onbalance they are beneficial. Finally, there are some who believe that trade agreements shouldonly deal with trade barriers, while there are others who would have them almost mimic a globalgovernment. The truth is that for trade to be free it must command popular support, and to do soit must be perceived as fair. This requires rules that do more than simply reduce barriers; it alsorequires rules that leave considerable scope for national autonomy and diversity.

Some suggest that while the GATT helped advance U.S. geopolitical interests during the ColdWar, the United States no longer needs the organization now that the Cold War is over.

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However, the U.S. economy is more open now than ever before and international trade is vital toU.S. economic interests. Our participation in the WTO is the centerpiece of our trade policy.But, while freer trade brings benefits it is important to recognize it is not a panacea. It is crucialto ensure that the benefits of trade are shared widely and that the rule of law governing it be fair.Trade policy also needs to part of broader economic strategy and it needs to be supplemented bypolicies that facilitate change and promote equity. The Clinton Administration has madeopening markets at home and abroad one of the pillars of its economic policies, but it has alsorecognized the importance of macroeconomic policies to achieve fiscal discipline andmicroeconomic policies to invest in people and technology.

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Appendix: Key Achievements of the Uruguay Round Negotiations53

For nearly 50 years, the General Agreement on Tariffs and Trade (GATT) served as both aninternational agreement and international organization. It dealt with international trade in goodsand did not cover trade in services, such as transportation, tourism, insurance, andtelecommunications, or trade-related aspects of intellectual property rights. The Uruguay Roundfurther reduced tariffs on industrial products, brought more sectors more fully into themultilateral fold, strengthened the rules of conduct for international trade, and created a newinstitution – the World Trade Organization. As a result, the multilateral trading system nowmore fully covers agriculture, textiles and clothing, services, and intellectual property rights.

As a result of the Uruguay Round, the negotiating governments greatly increased the proportionof their trade that is “bound” by tariff concessions (legal commitments limiting maximum tariffrates). They also reduced tariff rates. Some developing countries made and bargained for tariffconcessions for the first time. Moreover, as a result of the Agreement on Agriculture, allagricultural products of all WTO Members are now bound by tariff concessions. Even if aconcession simply fixed in place a tariff rate that was already being applied on a de facto basis,the tariff concession provides legal certainty, which is definitely positive even if its value may bedifficult to quantify.

Most importantly, the Uruguay Round created the World Trade Organization (WTO), and itsmore effective dispute settlement mechanism. The GATT still has its place at the center of theWTO system, but it is now administered by the WTO, and is tied to other agreements on trade ingoods, as well as the General Agreement on Trade in Services (GATS) and the Agreement onTrade-Related Aspects of Intellectual Property Rights (TRIPS). Disputes concerning any ofthese multilateral agreements are subject to one set of dispute settlement procedures, theUnderstanding on Rules and Procedures Governing the Settlement of Disputes or “DisputeSettlement Understanding” (DSU).

Industrial Products. In most cases, the Uruguay Round cuts in developed countries’ tariffs onimports of industrial products, excluding textiles and clothing, are being phased in over 5 years,beginning January 1, 1995. By the end of the phase in, these tariffs will be cut by about 40percent, from an average of 6.3 percent to an average of 3.8 percent. The proportion of importsof industrial products that receives duty-free treatment in developed countries will increase from20 percent by value to 44 percent. Before the Uruguay Round, 78 percent of developedcountries’ tariff lines were bound; after the Uruguay Round, 99 percent will be bound. Indeveloping countries, the percentage of bound tariff lines went from 21 percent to 73 percent.Economies in transition agreed to increase their bindings from 73 percent to 98 percent.

Agricultural Products. The Uruguay Round succeeded in bringing agriculture more fully intothe multilateral trading system. Through the negotiation of the Agreement on Agriculture, alltariffs on agricultural products are bound, and non-tariff barriers were converted to tariffs by“tariffication.” Industrial countries agreed to cut tariffs on agricultural products by 36 percent on

53 This appendix draws from the World Trade Organization, http://www.wto.org/about (downloaded September 19,1999) and the GATT Secretariat, “The Results of the Uruguay Round of Multilateral Trade Negotiations, MarketAccess for Goods and Services: Overview of the Results” (November 1994).

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average over six years; developing countries agreed to cut their tariffs by 24 percent on averageover ten years. For products subject to tariffication, the Agreement permits special safeguards toprotect against import surges. The Agreement also limits and reduces countries’ use of exportsubsidies and trade-distorting domestic supports. Agriculture is part of the WTO’s built-inagenda, with talks scheduled to begin by December 31, 1999.

Textiles and Clothing. From 1974 until the end of the Uruguay Round, trade was governed bythe Multi-Fiber Arrangement (MFA). The MFA was a framework for bilateral agreements andunilateral actions, based on quantitative restrictions on imports. In 1995, the WTO’s Agreementon Textiles and Clothing (ATC) replaced the MFA. The ATC will integrate the textile andapparel sector into the GATT rules, by eliminating quota restrictions gradually over a ten-yearperiod. Like the Agreement on Agriculture, the ATC also allows special safeguards to protectagainst import surges. By 2005, all import quotas and discrimination will end and the ATC willterminate. The Uruguay Round also established a Textiles Monitoring Body to supervise theATC’s implementation.

Services. The GATS provides multilaterally agreed and legally enforceable rules, covering allinternationally traded services (except most air transport services). It extends MFN treatment toall WTO members, with limited exceptions, and extends national treatment and market accessobligations in areas where a country has made a specific commitment. The GATS provides rulesfor regulatory transparency, other aspects of regulation, recognition of other countries’qualifications, and international payments and transfers. As a result of bilateral negotiations,individual countries made legally binding commitments to open markets and/or providenondiscriminatory treatment in specific service sectors. A set of “schedules” lists the sectorsbeing opened, the extent of market access being given in those sectors, and any limitations onnational treatment. Although some commitments did not go beyond the market access offered atthe time they were made, they still prevent governments from backtracking on access; the GATSmet the objectives of bringing services into the multilateral trading system and providing thecertainty needed for business decisions. As in the case of agriculture, the service sector isincluded in the WTO’s built-in agenda, with a full new round of negotiations scheduled to beginno later than January 1, 2000.

A series of annexes to the GATS addresses particular concerns of different industries, includingthe movement of natural persons, financial services, telecommunications, and some air-transportservices. Negotiations on specific commitments in financial services and telecommunicationscontinued after the Uruguay Round, as part of the built-in agenda, and resulted in newliberalization packages. Talks on the movement of natural persons also continued and achievedmodest results. Further talks on maritime services were scheduled, but suspended.

Intellectual Property. The TRIPS Agreement requires a minimum standard of intellectualproperty rights protection and enforcement of intellectual property rights. It also provides forbasic rights to non-discriminatory treatment. The Agreement deals with copyright and relatedrights, including for computer programs, data bases, sound recordings and films; trademarks andservice marks; geographical indications, including appellations of origin; patents, including theprotection of new varieties of plants; industrial designs; layout designs of integrated circuits;protection of undisclosed information, including trade secrets and test data. Substantive

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provisions of the main international agreements of the World Intellectual Property Organizationprovide the basis for protection, with additions and modifications. For example, under TRIPSthe Berne Convention for the Protection of Literary and Artistic Works now applies to computerprograms. Moreover, the TRIPS Agreement also addresses patents by requiring that patentprotection be available for a 20-year minimum for all inventions, whether products or processes,in almost all technology fields.

The TRIPS Agreement also requires WTO members to provide procedures and remedies undertheir domestic law to ensure that foreign right holders can effectively enforce intellectualproperty rights. Under some circumstances, member countries may adopt measures to prevent orcontrol practices in the licensing of intellectual property rights that are abusive or anti-competitive. When the WTO Agreements took effect on January 1, 1995, developed countrieswere given one year to bring their laws and practices into conformance with the TRIPSAgreement. Developing countries and some economies in transition were given longer transitionperiods. The TRIPS Agreement, like the GATS and the agreements on trade in goods, can beenforced through the WTO’s dispute settlement procedures.

Other WTO Agreements. The Round also brought agreements relating to trade in goods, togoverning anti-dumping measures, subsidies and countervailing duties, safeguards, and totechnical barriers.

• Anti-Dumping Measures. The Anti-Dumping Agreement, more formally the Agreement onthe Implementation of Article VI of the GATT 1994, permits WTO members to assessantidumping duties on imports of a product if it is dumped (as defined by the agreement) andif the dumped imports have been found to cause or threaten material injury to the domesticindustry producing the product. The Agreement also provides for due process andtransparency in anti-dumping investigations.

• Subsidies and Countervailing Measures. The Agreement on Subsidies and CountervailingMeasures provides rules for the use of domestic subsidies and countervailing duties offsettingthose subsidies. Under the Agreement, a country may seek the withdrawal of a subsidy orremoval of its adverse effects, by bringing a WTO dispute. A country may also assesscountervailing duties on imports of a subsidized product, offsetting the value of the subsidy,if the subsidized imports have been found to cause or threaten material injury to the domesticindustry producing a like product. The Agreement applies to both industrial products andagriculture, although its application to agriculture has been modified by the operation of atemporary “peace clause” in the Agreement on Agriculture. Some exceptions apply tosubsidies of developing countries.

• Emergency Protection from Imports. The Agreement on Safeguards allows countries totemporarily restrict imports of a product if an absolute or relative import surge is causing orthreatening to cause serious injury to the domestic industry producing a like or directlycompetitive product, and if the importing country has conducted an investigation thattransparently and objectively examines certain factors bearing on serious injury. (TheAgreement prohibits the use of “gray area” measures, including voluntary export restraintsand orderly marketing arrangements.) When the serious injury has been caused by an

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absolute import surge, and the importing country conducts a transparent and objectiveinvestigation consistent with the Safeguards Agreement, its trading partners cannot take acompensatory suspension of concessions against it for the first three years that such a“safeguard” measure is in place. Special rules apply for safeguard measures affectingdeveloping country products.

• Technical Barriers to Trade. The Agreement on Technical Barriers to Trade (TBT) tries toensure that regulations, standards, testing and certification procedures do not createunnecessary obstacles to trade. The Agreement on TBT does not prohibit countries fromadopting standards, or require that standards be harmonized internationally. Rather, it setsout a ‘code of good practice’ for the preparation, adoption, and application of standards bycentral government bodies and others.

• Health Regulations for Farm Products. Complementary to the Agreement on TBT and theAgreement on Agriculture, the Agreement on Sanitary and Phytosanitary Measuresestablishes rules for standards to protect human, animal, and plant health. The Agreementurges countries to adopt internationally agreed standards to the extent possible, but it doesnot prohibit countries from setting their own, possibly higher, standards. However, it doesrequire that all standards be based on science and non-discriminatory.

• Miscellaneous. The Uruguay Round agreements also include the Agreement on ImportLicensing Procedures; the Agreement on Implementation of Article VII of the GATT 1994and related ministerial decisions on customs valuation; the Agreement on PreshipmentInspection; the Agreement on Rules of Origin; and the Agreement on Trade-RelatedInvestment Measures.

Plurilateral Agreements. The WTO Agreement also provides the framework for twoagreements which only some, not all, of the WTO Members have accepted. These are theAgreements on Trade in Civil Aircraft and on Government Procurement, which were originallynegotiated during the Tokyo Round. During the Uruguay Round, the Agreement on GovernmentProcurement was renegotiated and replaced with a new agreement that now applies to moreentities and to services. The procurement agreement applies only to agencies listed by each ofthe governments that is party to the agreement. These agencies’ procurement is then subject torules that guarantee fair and non-discriminatory conditions of international competition.

Dispute Settlement. The Dispute Settlement Understanding improves upon previous rules andprocedures. It creates a single system for addressing disputes under each of the WTO’smultilateral agreements and the Agreement on Government Procurement; provides an expeditedprocess with clearly defined stages; prevents individual countries from blocking the adoption ofrulings; and authorizes countermeasures if an adopted ruling is not implemented. Ordinarily, acase should not take more than a year – or 15 months if it is appealed. (If either side requests,members of an Appellate Body hear appeals of panel rulings.) Moreover, in a reversal of theGATT procedure, all dispute settlement rulings – including those of the Appellate Body – areadopted automatically, unless there is consensus to reject a ruling.

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After a ruling is adopted, a country faces three possible outcomes: it can adhere to therecommendations of the panel; it can compensate the claimant; or the claimant can suspendpreviously granted concessions of like amount. The general principle is that the suspensionshould occur in the same sector of trade (for example, a violation in the goods sector should bemet with suspended concessions in the goods sector). If this is not practicable or effective, thesuspension can occur in other sectors, and so the dispute settlement system helps integrate theobligations of the entire WTO system.

Trade Policy Review Mechanism. The TPRM provides a regular forum for monitoring eachcountry’s performance in the WTO system, through reports by countries and the WTOSecretariat and discussions between WTO member governments. The review is not legallybinding. Its objectives are to increase the transparency and understanding of countries’ tradepolices and practices through regular monitoring; improve the quality of public andintergovernmental debate on the issues; and enable a multilateral assessment of the effects ofpolicies on the world trading system.

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List of Frequently Used Acronyms

APEC Asia-Pacific Economic CooperationATC Agreement on Textiles and ClothingDSU Dispute Settlement UnderstandingEU European UnionILO International Labor OrganizationGATT General Agreement on Tariffs and TradeGATS General Agreement on Trade in ServicesGDP Gross Domestic ProductGNP Gross National ProductMFA Multi-Fiber ArrangementMFN Most-Favored NationNAFTA North American Free Trade AgreementNGO Non-Governmental OrganizationNIE Newly Industrializing EconomyOECD Organization for Economic Cooperation and DevelopmentTBT Technical Barriers to TradeTPRM Trade Policy Review MechanismTRIPS Trade-Related Aspects of Intellectual Property RightsTRIMS Trade-Related Investment MeasuresUNEP United Nations Environmental ProgramWTO World Trade Organization